Hertz will sell $1 billion of debt in first big step to patch a battered balance sheet

Hertz Global Holdings Inc. is expected to price a debt issue later Wednesday that is viewed as a first step for the car-rental company to repair its battered balance sheet.

The company, fighting in a floundering car-rental industry, is expected to offer $1 billion in second-lien secured notes that are backed by domestic subsidiaries. The company
HTZ, +1.18%
intends to use the proceeds to redeem $690 million of existing debt of varying maturities. The rest of the money raised will be combined with cash to refinance other debt.

The deal “will go a long way to calming nerves on liability management ... underscoring that Hertz can get back to executing on its plan,” CreditSights analysts led by Glenn Reynolds wrote in a note.

Investors have been impatient. Hertz stock has slid 75% in the last 12 months, while many of its bonds are trading just above 80 cents on the dollar. In early May, Moody’s downgraded the company’s already junk-level credit rating to B2, pushing it five notches into speculative territory.

The downgrade reflects “both the near term challenges the company faces as a result of declining residual values and weak pricing, and also the longer-term risks associated with implementing its turnaround plan,” said Bruce Clark, a Moody’s senior vice president.

The Hertz plan has some merit because it focuses on key areas of fleet purchase management, vehicle procurement and disposition strategies, as well as investing in technology. But it will take years to implement and in the meantime, earnings will be well below historical levels through at least 2018, said Clark.

Hertz, which has its roots in early 20th century Chicago, was acquired away from Ford Motor Co.
F, -0.08%
in 2005 by a private-equity group led by Clayton Dubilier & Rice for $5.6 billion and the assumption of about $10 billion of Hertz debt. The deal was financed with a mixture of $2.3 billion in equity and more than $12 billion in debt, as The Wall Street Journal reported at the time.

‘The mix of largest equity holders in Hertz underscores that this is an exercise in deep-dive value investing in a company that is also a high-risk credit.’
Glenn Reynolds, CFA, CreditSights

Today, the company has about $14 billion in long-term debt, split between bonds, loans and asset-backed structures. That debt has become a heavy burden during a lean time for car-rental companies, which have been squeezed by lower rental prices, rising fleet costs and diminishing demand amid the availability of ride-sharing companies.

Adding to the gloom, in 2014 and 2015, the company disclosed a series of accounting errors that forced it to restate earnings from 2011 to 2013. The news forced the resignation of then-CEO Mark Frissora.

In January, Kathryn Marinello, an adviser to private-equity firm Ares Capital Management, became the company’s third CEO in as many years. Marinello has done stints as CEO of Ceridian Corp. and held senior roles at General Electric Co.
GE, -0.72%
, among others, and has been welcomed by activist investor Carl Icahn, who owns a 34.9% stake in the company and is its biggest shareholder, according to FactSet data.

Hertz posted a far wider-than-expected loss for the first quarter, weighed down by plummeting used-car prices, another stumbling block for car-rental companies, as a large part of their’ business is offloading the thousands of cars they retire from their fleets every year.

Today’s challenge is “the low confidence in Hertz after so many miscues in recent years and doubts around execution from a company that has not demonstrated such ability in 2014 to 2016,” said CreditSights. “For bondholders and credit counterparties, the exercise is determining how such risk should be priced.”

The research firm also considered the question of what equity markets are signaling about Hertz, and whether stock price moves suggest investors are expecting distress or even bankruptcy. Analysts concluded that stock investors were mostly reacting to expected earnings weakness, but that negative credit market headlines were also rattling nerves.

“The mix of largest equity holders in Hertz underscores that this is an exercise in deep-dive value investing in a company that is also a high-risk credit,” they wrote.

Hertz has ranked among the most actively traded bonds for the past month, said CreditSights’ Reynolds. Hertz credit ranked third in total U.S. high-yield trading volumes for the past month, and has been in the top 10 for the last three months. Among high-yield consumer discretionary issues, trading volume in Hertz was greater than the second most popular consumer name, L Brands Inc.
LB, +4.03%
the owner of Victoria’s Secret, he wrote.

“That is a lot of buying and selling,” said the analyst. “In other words, there are a lot of questions being asked about Hertz and many investors are coming out with different answers on price versus risk.”

Hertz’s most-active bonds, the 5.500% notes that mature in October of 2024, were trading at 82 cents on the dollar Wednesday, to yield 8.881%, according to MarketAxess.

In the stock market, shares were up 2.9% at $9.68. The S&P 500
SPX, +0.01%
was down 0.2%.

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